National City's Mean Streets
National City Corporation's (NCC) second quarter GAAP net loss of $2.45 per diluted share was substantially worse than the estimates, primarily due to higher loss provisions and a non-cash goodwill impairment charge of $1.1 billion.
During the quarter, credit metrics deteriorated significantly and net-interest income fell short of expectations. The company raised $7.0 billion in capital and also reduced its quarterly dividend to $0.01 per share, to strengthen its capital position. These actions have resulted in significant dilution to the existing shareholders.
NCC's heavy exposure to the real estate; especially in the areas facing severe stress (Michigan, Florida, Ohio and California) will continue to create the headwinds for the company in the coming quarters. We are particularly concerned by the $24 billion commercial real estate portfolio, of which $3.7 billion is the residential development portfolio. We also see elevated risk in the run-off portfolios of First Franklin nonprime mortgages and home equity loans originated through brokers.
Further, though, NCC has taken several initiatives to restructure its mortgage operations, we continue to see elevated risks in NCC's mortgage and residential development loan portfolio and expect higher losses in the coming quarters. We are maintaining our Sell rating on the shares.
Based on the 2Q08 results, we have adjusted our FY08 and FY09 earnings estimate to a negative $1.60 per share and a negative $0.15 per share, respectively. On a price-to-book basis, the shares currently trade at a 71% discount to the peer group median, versus a 77% discount previously.
Our $4.50 price target equates to 0.2 times our projected book value six months out (now December 2008). As NCC has reduced its quarterly dividend by 95% to $0.01 per share recently, the target price implies 10.5% negative return over the period.
Standard Motor Weathering Storm
In the second quarter, Standard Motor Products, Inc. (SMP) reported losses from continuing operations were $0.04 per diluted share, compared to earnings of $0.30 per diluted share in the prior-year quarter. Consolidated net sales for the first quarter were $215 million, versus $217 million during the comparable quarter in 2007.
The company enjoys strong brand recognition and a less cyclical end-market within the auto and auto parts industry. Moreover, SMP expects to benefit from the shifting of its production facilities to Reynosa, Mexico, due to lower labor costs.
However, slow growth, weak pricing in the company's key businesses and higher gasoline and metal prices are serious matters of concern.
